Valuation and Returns of Drug Development Companies: Lessons for Bioentrepreneurs and Investors

Abstract

Objectives: This study evaluates the association of Biopharma company valuation with the lead drug's development stage, orphan status, number of indications, and disease area. We also estimated annual returns Bioentrepreneurs and investors can expect from founding and investing in drug development ventures.

Methods: SDC Thomson Reuter and S&P Capital IQ were screened for majority acquisitions of US and EU Biopharma companies developing new molecular entities for prescription use (SIC code: 2834). Acquisition data were complemented with drug characteristics extracted from clinicaltrials.gov, the US Food and Drug Administration (FDA), and deal announcements. Thereafter, company valuations were combined with previously published clinical development periods alongside orphan-, indication-, and disease-specific success rates to estimate annual returns for investments in drug developing companies.

Results: Based on a sample of 311 Biopharma acquisitions from 2005 to 2020, companies developing orphan, multi-indication, and oncology drugs were valued significantly higher than their peers during later development stages (p < 0.05). We also estimated significantly higher returns for shareholders of companies with orphan relative to non-orphan-designated lead drugs from Phase 1 to FDA approval (46% vs. 12%, p < 0.001). Drugs developed across multiple indications also provided higher returns than single-indication agents from Pre-Clinic to FDA approval (21% vs. 11%, p < 0.001). Returns for oncology drugs exceeded other disease areas (26% vs. 8%, p < 0.001).

Conclusions: Clinical and economic conditions surrounding orphan-designated drugs translate to a favorable financial risk-return profile for Bioentrepreneurs and investors. Bioentrepreneurs must be aware of the upside real option value their multi-indication drug could offer when negotiating acquisition or licensing agreements.

Keywords: Drug development; Investment; Multi-indication; Oncology; Orphan; Valuation.

Fig. 1

Company valuation, investment multiples, and annual returns by lead drug’s FDA orphan designation status and number of indications. Graphs in the first row compare the valuation (A), investment multiples (B), and annual returns (C) for companies with orphan- and non-orphan-designated lead drugs by development stage. Graphs in the second row compare the valuation (D), investment multiples (E), and returns (F) for companies with multi-indication and single-indication lead drugs by development stage. Valuation data from our sample of 311 Biopharma acquisitions (2005–2020) were inflation adjusted to 2020 values and combined with previously published success rates and development periods to calculate multiples and returns [11, 16]. No valuation data exist for the Pre-Clinic orphan category given that the FDA only issues the orphan designation status after IND approval. P values calculated based on ANOVA with Dunnett’s test: *p < 0.05, **p < 0.01, ***p < 0.001. FDA US Food and Drug Administration

Fig. 2

Company valuation, investment multiples, and annual returns by lead drug’s molecule type and disease area. Graphs in the first row compare the valuation (A), investment multiples (B), and annual returns (C) for companies with biologics or gene/cell therapies and small-molecule lead drugs by development stage. Graphs in the second row compare the valuation (D), investment multiples (E), and returns (F) for companies with lead drugs in oncology, CNS, and other disease areas by development stage. Valuation data from our sample of 311 Biopharma acquisitions (2005–2020) were inflation adjusted to 2020 values and combined with previously published success rates and development periods to calculate multiples and returns [11, 16]. The disease category other includes immunology, infectious disease, cardiovascular, dermatology, internal medicine, and ophthalmology. P values calculated based on ANOVA with Dunnett’s test (Sidak’s test for disease area): *p < 0.05, **p < 0.01, ***p < 0.001. CNS central nervous system